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Notes from the Federal Open Committee Meeting

Tuesday, January 13, 2015 6:30 AM

Federal Reserve officials saw economic turbulence abroad as a significant risk to the U.S. economy when they met in December, but they looked past those concerns in part because they expect policy makers in Europe and elsewhere to respond with new growth-inducing measures.

Despite concerns about slow growth abroad and the uncertain implications of sharp declines in global oil prices on inflation and growth, Fed officials decided at the meeting to signal that U.S. interest rates are likely to rise in 2015.

The latest minutes included several references to the weight U.S. officials and market participants are placing on new actions to counteract slow growth outside the U.S. The references amounted to a subtle warning that markets and the global economy more broadly could respond negatively if the foreign policy makers, particularly the European Central Bank (ECB), don’t follow through on expectations.

Market anticipation of higher rates in the U.S. coupled with new money-printing measures by the ECB is putting upward pressure on the U.S. dollar. That in turn holds down already-low U.S. inflation and could spur capital flows to the U.S. that distort markets.

The minutes showed that Fed officials "regarded the international situation as an important source of downside risks to domestic real activity and employment." They added that the risks were particularly serious "if foreign policy responses were insufficient," a striking warning to ECB officials to follow through after months of hints of a new bond-purchase program, which is meant to hold down long-term rates and drive investors into risky assets.

Other factors also gave officials pause, including the implications of a sharp drop in the price of oil and downward pressure on inflation and inflation expectations from oil. Falling oil prices were expected to pull inflation down further in the near term, keeping consumer price increases below the Fed’s 2 percent target.

Fed officials noted several reasons to remain upbeat about the U.S. economy. Indicators of consumer and business confidence, as well as the solid record of payroll employment gains in 2014, suggested that the real economy may end up showing more momentum than anticipated, while a few others thought the boost to domestic spending coming from lower energy prices could turn out to be quite large.